Many Canadians find it difficult to afford their monthly car financing payments to keep their vehicle on the road. Estimates show that the average monthly cost for a car now stands at $525 for used automobiles and $700 for brand-new ones. To make these payments more affordable, many consumers think about refinancing, which involves replacing their current loan with a new one. If your financial situation has changed since you took out your present loan or the market has improved, refinancing can result in lower monthly payments.
Refinancing, however, carries considerable risk and occasionally comes with higher costs. Therefore, it's wise to weigh the advantages and disadvantages of refinancing and evaluate your financial status to decide if it's a smart and suitable option.
In this article, we’re going to go over the pros and cons of refinancing your car loan and how to determine whether it’s the right choice or not for you.
The Pros of Refinancing Your Car Loan
Lower Interest Rates
Your monthly vehicle loan payment is significantly affected by your interest rate. This sum is determined, among other things, by your credit score. It may be a wonderful opportunity to look into refinancing alternatives if your credit has improved since you took out your original loan, which might happen if you've made on-time loan payments and managed your other bills responsibly.
Lower Monthly Payments
Refinancing can lower your monthly payment and free up money in your budget if you have trouble making your loan payments. You can choose to extend your loan term to make your payments smaller. Although agreeing to a longer-term allows you to save money each month, it will cost you more overall because you will pay more in interest over the course of the loan.
Pay Off Your Car Loan Faster
Refinancing to a shorter term can make sense if your income has increased since taking out your original car loan. You'll save money on interest if you pay off your loan early, provided the lender's prepayment penalty doesn't outweigh your savings.
However, if you'd rather not refinance, you can increase your monthly payments to pay down the total quicker. By eliminating the origination fees that may be associated with refinancing, you'll achieve the same goal while potentially saving money.
The Cons of Refinancing Your Car Loan
The Risk of Higher Interest Rates
Higher interest rates are a potential risk of refinancing. Due to the market, interest rates have increased and if you’re credit has declined, you’ll like end up paying more in interest. Interest rates have reached all-time highs as a result of the current market. In order to avoid extremely high interest rates, it is therefore in your best interest to look for alternative solutions or to wait it out until the market conditions improve.
Refinancing your loan will can cost you more money when you consider the cost of the additional fees. Application, prepayment, title transfer, and origination fees are a few examples of these additional fees. Calculate the cost of the refinance and how the rate and term compare to your present loan because the fees can add up, costing you more.
Risk of Being in an Upside-Down Loan
You are more likely to end up owing more than the total value of your vehicle if you refinance and lengthen the loan's term. This is also known as having an upside-down loan.
How to Determine if Refinancing is Right for You
Your credit has improved. You may be able to refinance with better terms and rates if your credit score has improved since you signed your original loan.
You used dealer financing. The terms provided by dealerships are typically not great. If you have dealer financing now, look into alternative funding possibilities.
You can’t make your loan payments. Missing payments may result in fees, harm your credit, or worse, lead to the vehicle being repossessed. Refinancing could result in a lower monthly payment if you are unable to make the current payments.
You qualify for a better rate. If market interest rates are lower than when you first applied, you might be eligible for a reduced rate.